December 9, 2019

Bank of England Leaves Interest Rate Unchanged

LONDON — The Bank of England decided to keep its benchmark interest rate unchanged on Thursday amid doubts about the strength of Britain’s economic recovery.

The central bank left its interest rate at 0.5 percent, a record low, and also held its program of economic stimulus at £375 billion, or about $580 billion. Some economists expect the Bank of England to expand its bond-buying program later this year to help the recovery, while others said recent economic data was encouraging and further stimulus might not be necessary.

“There are broad improvements in business sentiment and with equity markets heading to new high, we are not expecting anything” until Mark Carney takes over as governor of the Bank of England in July, said James Knightley, an economist at ING Bank in London, before the rate announcement.

The British economy narrowly avoided falling back into a recession for a third time in five years at the beginning of this year. The 0.3 percent growth in the first three months of this year was hardly a sign of a robust recovery, but it allowed George Osborne, the chancellor of the Exchequer, to dispel critics of his austerity measures, who had argued that spending cuts and tax increases would pull Britain back into a recession.

While still in decline, the manufacturing and construction industries shrank less than some economists had expected in April and the services sector also strengthened last month. Economic confidence is improving and house prices increased to the highest in almost three years in April, according to Halifax, a mortgage lender.

Under pressure to show his austerity program was indeed repairing Britain’s economy by reducing the budget deficit without choking off growth, Mr. Osborne in March gave the Bank of England more flexibility in supporting the economy without the need to lower inflation in the short term.

Consumer price inflation is at 2.8 percent, above the Bank of England’s 2 percent target. Prices have been climbing faster in Britain than in the euro zone or the United States, squeezing households as salaries remain broadly unchanged.

The European Central Bank cut its benchmark interest rate to a record low of 0.5 percent from 0.75 percent last week. The move was widely expected and seen as mostly symbolic, to show that the E.C.B. president, Mario Draghi, was willing to act to bolster the euro zone as recession threatens to engulf countries that were previously spared, like Germany.

The troubles in the euro zone also weighed on Britain, which is a member of the European Union but not part of the euro zone. The region is Britain’s largest single export market. Mr. Osborne repeatedly pointed to weak demand for goods and services from the euro zone as a reason for the slow recovery of the British economy.

Mr. Knightley is among the economists who expect the arrival of Mr. Carney at the helm of the Bank of England in two months to bring some change to the London institution. Mr. Carney, currently the governor of the Bank of Canada, might be more specific about what to expect from interest rates in the future, Mr. Knightley said. Few economists currently expect interest rates to increase before the end of next year.

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Economix Blog: Hawks and Doves at the Fed

The economist Dean Baker recalls a story about Janet Yellen, the Federal Reserve vice chairwoman, that seems at odds with the story that opens my profile of Ms. Yellen in Thursday’s paper.

I wrote that in July 1996, Ms. Yellen was concerned that the Fed might drive inflation too low. Mr. Baker wrote Thursday that in September 1996, Ms. Yellen pressed for higher interest rates because she was concerned that inflation was too high.

The stories are both true and, taken together, do a nice job of illustrating the complexity of labeling Fed officials in general, and Ms. Yellen in particular.

The debate in July 1996 was about the Fed’s long-term goals.

The Fed’s chairman at the time, Alan Greenspan, maintained that the Fed should seek to eliminate price inflation. Asked by Ms. Yellen how he would define price stability, Mr. Greenspan responded, “I would say the number is zero, if properly measured.”

Ms. Yellen replied, “Improperly measured, I believe that heading toward 2 percent inflation would be a good idea, and that we should do so in a slow fashion, looking at what happens along the way.”

The entire transcript, which is very much worth reading, is available on the Fed’s Web site.

The debate in September 1996 was about that moment in time.

Inflation was still running at an annual pace of about 3 percent, and Ms. Yellen was concerned that the pace would rise.

The former Fed governor Laurence H. Meyer tells the story as follows. The full version is here.

“Before the September 1996 FOMC meeting, Janet and I went to see the Chairman to talk about the policy decision at that meeting and at following meetings. This was the only time I ever visited the Chairman (at my initiative) to talk about monetary policy, before or after a meeting. Janet and I were both worried about inflation, even though it was very well contained at the time. We told the Chairman that we loved him but could not remain at his side much longer if he continued, as he had been doing for some time, to push the next tightening action into the next meeting, and then not follow through. He listened, more or less patiently. I recall, though this may have not been the case, that he just smiled and didn’t say a word. After an awkward silence, we said our good-byes.”

Ms. Yellen, in other words, did not want inflation to fall below 2 percent, but she also did not want it to rise above 3 percent. She had a somewhat greater tolerance for inflation than Mr. Greenspan, but she was more concerned that inflation would rise, so she wanted to raise interest rates.

Mr. Greenspan, by contrast, had less tolerance for inflation, but also was less concerned that inflation would rise. So he held rates steady.

Ponder this for a moment: Which one was the hawk and which the dove?

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Economix Blog: Not Enough Inflation

Yes, we have low inflation: The Commerce Department reported Friday that prices rose just 1.2 percent over the 12 months ending in January.

Such slow inflation is not, in and of itself, an argument for the Federal Reserve to expand its economic stimulus campaign. That depends on whether one expects inflation over the next year or two to rise closer to the 2 percent annual pace the Fed considers most healthy. As it happens, most Fed officials do.

But the January number does underscore that the Fed failed to do its job over the last two years. It underestimated the stimulus that the economy required then to prevent inflation from sagging below 2 percent now.

Indeed, annual price inflation has been less than 2 percent in four of the last five years, according to the Fed’s preferred measure, the personal consumption expenditures index published by the Bureau of Economic Analysis. The chart below shows 12-month inflation measure for personal consumption expenditures (known as P.C.E. inflation) month by month since 2000.

Inflation rate based on personal consumption expenditures.Source: Bureau of Economic Analysis Inflation rate based on personal consumption expenditures.

As Janet Yellen, the Fed’s vice chairwoman, said last April, “In effect there has been a significant shortfall in the overall amount of monetary policy stimulus since early 2009,” because the central bank can’t push short-term interest rates below zero, and its other measures, like asset purchases, haven’t filled the gap.

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Unemployment in Euro Zone Reached New High in October

Annual inflation in the euro zone was 2.2 percent in November, the European Union’s statistics office, Eurostat, said on Friday, dropping from 2.5 percent in October.

Months of stubborn inflation combined with record unemployment have made life even harder for indebted families struggling through three years of a public debt crisis that has forced governments and companies to drastically cut jobs.

One of the smallest rises in energy price inflation in a year helped bring consumer inflation to near the European Central Bank’s target of 2 percent, according to Eurostat’s first estimate.

But the euro zone economy, which this year sank into its second recession since 2009, may manage only a weak recovery next year and unemployment levels will continue to rise, economists and policymakers say.

“We have not yet emerged from the crisis,” the European Central Bank president, Mario Draghi, said on Friday. “The recovery for most of the euro zone will certainly begin in the second half of 2013,” he told France’s Europe 1 radio.

Unemployment rose to 11.7 percent in October, Eurostat said, up from 11.6 percent in September and a marked increase from the 9.9 percent level a year ago, leaving almost 19 million people out of a job.

Portugal, for instance, shed more than one in 20 public sector jobs in the first nine months of 2012, while employers ranging from car makers to financial groups have announced thousands of job cuts since September.

Still, the overall number masks wide divergences across the 17-nation bloc, with Austrian unemployment running at 4.3 percent of the working population and Spain’s joblessness levels at 26.2 percent, the highest in Europe.

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Inflation Cooling Off in China

HONG KONG — Inflation and industrial activity in China cooled markedly in November, according to data released Friday — an important development that raises the likelihood that the authorities in Beijing will seek to inject more momentum into an economy that has become a key engine of global growth.

Consumer price inflation, which had topped 6 percent earlier in the year, sagged to just 4.2 percent in November, the Chinese statistics office reported. The increase was less than analysts had expected and marked a significant improvement from the 5.5 percent reading recorded the previous month.

At the same time, industrial output data, also released on Friday, showed that activity in November expanded just 12.4 percent from a year earlier. That reading was weaker than the 13.2 percent annual increase recorded in October, and highlighted a development that has become apparent in recent months: economic growth, which was red hot in 2010 and early 2011, has moderated significantly this year.

The positive news is that tighter bank lending, higher interest rates, curbs on property speculation and slowing export growth have also helped to ease inflation, which soared well above Beijing’s comfort level over the summer.

Better-than-expected harvests also have helped bring down food price inflation, which is a particularly sensitive issue in a country where many millions still struggle to make ends meet.

Although it may still be too early for China to claim complete victory over inflation, the sharp drop in inflation “does free up some wiggle room for monetary easing,” Xianfang Ren and Alistair Thornton, economists at IHS Global Insight in Beijing, wrote in a note Friday.

The Chinese authorities’ focus has increasingly shifted from fighting inflation to bolstering growth, especially as Europe, a key destination for Chinese-made goods, is mired in a debt crisis that has badly undermined growth prospects there.

The central bank in South Korea on Friday underscored the effect that a slowdown in the West will have across Asia when it lowered its 2012 growth forecast for South Korea to 3.7 percent, from an earlier projection of 4.6 percent.

And in Japan, revised gross domestic product data showed that the economy grew by less than initially expected during the past quarter: 5.6 percent annual growth from a previous estimate of 6 percent, and 1.4 percent quarterly growth from the previous estimate of 1.5 percent.

The worsening environment has already prompted several rate cuts in the Asia-Pacific region as policy makers race to shore up their economies.

The first significant policy response by Beijing came last week, when the central bank loosened the reins on bank lending by lowering the so-called reserve requirement ratio. Lower reserve requirements effectively free up more lending by banks.

The inflation data on Friday suggested that there will be another cut in the reserve requirement ratio in December, economists at ANZ in Hong Kong said in a note. “We also expect two more such cuts in the first half of 2012,” they said.

The government also “has considerable scope to support domestic demand by boosting income growth and by reducing the tax burden for both companies and individuals,” Jing Ulrich, chairwoman of global markets at JPMorgan Chase, wrote in a note on Friday.

Unlike in 2008 and 2009, when the Beijing introduced a 4 trillion renminbi, or $629 billion, stimulus package, the government’s response this time is likely to be “nuanced,” Ms. Ulrich said.

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China G.D.P. Rises 9.7 Percent

China’s gross domestic product increased by 9.7 percent in the first quarter from a year earlier, down from 9.8 percent in the final three months of 2010 but ahead of an expected 9.5 percent pace.

Consumer price inflation sped to 5.4 percent in the year to March, the fastest since July 2008 and topping market forecasts for a 5.2 percent increase.

Taken together, the data published by the National Bureau of Statistics on Friday showed that the world’s second-largest economy was still sizzling, little hindered by the central bank’s half-year tightening campaign that many investors had feared would undermine growth.

“The figures show that inflation pressure will not taper off in the short term and we expect the consumer inflation to remain high in the second quarter,” said Sun Miaoling, economist with CICC, the largest Chinese investment bank.

“The government will keep battling inflation as its priority in coming months, which could prompt the central bank to further tighten its monetary policies,” she added.

The People’s Bank of China has increased benchmark interest rates four times since last October and has required the country’s big banks to lock up a record high of 20.0 percent of their deposits as reserves.


Inflation had long been expected to run higher in March because of a lower base of comparison. The base effect also suggests that inflation is likely to level off in the coming months before jumping again in June and July, though officials are confident that it will wane in the second half of the year.

Accepting this relatively sanguine view, many economists had thought that the central bank was near the end of its tightening cycle. The median forecast of Reuters poll last week was for just one more interest rate increase over the rest of this year.

But with growth still cruising near double digits, the scope for the government to continue tightening may be bigger than previously anticipated.

Signaling a potentially hawkish stance in the coming months, Premier Wen Jiabao said this week that the government would use all tools at its disposal to wrestle inflation under control.

“We will try every means to stabilize prices, the top priority of our economic controls this year and also our most pressing task,” Wen said at a cabinet meeting.

Agricultural prices have been the main driver of Chinese inflation and that remained the case, with food costs up 11.7 percent in the year to March. But there were also signs of a broadening of pressures, with non-food inflation up 2.7 percent year on year, the fastest in more than a decade.

“The risk is that high oil prices will keep headline inflation stronger for longer,” said Brian Jackson, economist with Royal Bank of Canada in Hong Kong.

“This also suggests that policy rates still need to move higher in the months ahead, with Beijing also likely to favor further currency appreciation to help get inflation lower,” he said.

While keeping a tight grip on the yuan, China has steered its exchange rate to a succession of record highs against the dollar in recent days, using a stronger currency to blunt the impact of high import costs.


The first-quarter data also offered a glimpse of the Chinese rebalancing that is needed to put the global economy on more stable footing.

From the World Bank to Chinese leaders, the consensus has long been that China needs to promote more domestic consumption and cut its reliance on both exports and energy-intensive investment.

That finally appears to be happening. Consumption contributed 5.9 percentage points to China’s first-quarter growth rate, while investment added 4.3 percentage points, the statistics agency said. Net exports actually subtracted 0.5 percentage points, weighed down by a $1 billion trade deficit, China’s first quarterly deficit in seven years.

It remains to be seen how much of the apparent rebalancing was a product of soaring global oil costs, which both boosted China’s import bill and inflated consumption in price terms.

Speaking at a business forum in southern China on Friday, President Hu Jintao said that the country’s economic model was still out of kilter.

“Over the next five years China will make a great effort to boost domestic demand, especially consumer demand,” he said.

Global markets registered little impact from the Chinese data, in large part because the numbers appeared to have been comprehensively leaked in the days prior to the official release.

The main Chinese stock index in Shanghai was down 0.5 percent after morning trading and share prices throughout Asia were also slightly softer, with investors bracing for the next round of tightening by Beijing.

(Additional reporting by Aileen Wang, Huang Yan and Kevin Yao, and Ben Blanchard and Zhou Xin in Boao; Writing by Simon Rabinovitch; Editing by Ken Wills)

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